Online Insurance Provides An Ocean Of Opportunity

Esurance is betting on technology to help it successfully navigate the turbulent waters of selling and servicing insurance over the Internet.The obstacles that most all-Internet insurance companies must circumvent include no brand identity, a slim portfolio of products and stiff competition from entrenched carriers. But Jean-Bernard Duler was so convinced that the ocean of opportunity for so-called virtual insurers was unlimited, he sold his racing boat in 1998 to fund the creation of Esurance Inc.

The company's philosophy is simple. By selling personal insurance over the Internet supported by a call center, Esurance can cut out some overhead costs-agent commissions and other expenses-and pass the savings along to consumers.

Unlike some established carriers that are hampered by information systems that need to be retooled to support e-commerce, Esurance, which is based in San Francisco, invested its IT dollars in systems that support speed to market and flexible, best-of-breed architecture. And, rather than spend limited capital on technology to support services that can easily be outsourced, Esurance relies on third-party companies to administer such functions as customer support, Web hosting and claims processing.

Esurance executives acknowledge that the company doesn't have the brand recognition of such companies as State Farm Mutual Automobile Insurance Co. to attract consumers. However, the company intends to build its policyholder base by partnering with banks, brokerages and other financial service providers that are seeking to offer insurance services to their customers.

"I think Esurance has the most compelling business model that I have seen in retail insurance," says Richard Roby, director of insurance research for TowerGroup Inc., a Needham, Mass.-based financial services research and consulting firm. "Lower premium costs are a compelling reason to buy insurance online, and Esurance is passing its savings on to consumers, while other so-called virtual insurers are not."

Starting from scratch

Esurance is one of a growing number of start-up companies that are selling insurance online. Esurance is not a true insurance company; the company is able to issue automobile policies in 21 states through its relationship with Los Angeles-based Argonaut Insurance Co. Esurance's reinsurance backer is Stamford, Conn.-based General Reinsurance Corp., a wholly owned subsidiary of Berkshire Hathaway.

But what sets the company apart from other all-Internet insurers, industry observers say, is its team of insurance-industry executives and their commitment to using technology to provide low-cost insurance and superior customer service.

Duler, the company's chairman and CEO, is a 17-year veteran who served as a senior executive at Cigna, AXA Insurance and FM Insurance. In April, Duler hired Gary Tolman, who spent 15 years with Fireman's Fund Corp., to serve as the company's president and COO.

"Esurance has a group of smart, savvy executives and great financial backers, which always is beneficial," says Gary R. Craft, managing director, e-finance research, for DB Alex. Brown, San Francisco. "The company is counting on a combination of superior customer service, low pricing and a painless customer experience to succeed."

Selling insurance directly to consumers via the Internet was a concept that Duler says evolved from his educational background-he earned an engineering degree from the Ecole Nationale des Mines in France, and received his Masters in Business from Wharton School, University of Pennsylvania-and from his experience in managing insurance businesses for Cigna and AXA in Europe.

"In Europe, you don't have the restrictions that you have here that for years prevented banks from selling insurance," Duler says. "And most insurance companies have old legacy systems that are hard to bring online; it's much easier to start from scratch."

After consulting with executives from Redwood City, Calif.-based InsWeb Corp. and other companies to gain insight about the developing online insurance market, Duler wrote a business plan, sold his racing boat and invested $300,000 of his own money to form the company. He then hired Huyen Bei, who was a senior member of Arthur Andersen's Center for Strategic Technology, in Palo Alto, Calif., to be Esurance's chief technology officer. By April 1999, Bei and Duler had developed a technology plan to support the company's operations.

Esurance's architecture was developed in-house and integrates such insurance functions as quoting, underwriting, comparative rating, new policy setup, policy management, online billing, data validation and data warehousing. The infrastructure is based on the Microsoft Distributed Internet Architecture.

The company is in the process of migrating business components from Visual Basic to an Enterprise Java Beans architecture based on BEA WebLogic and Oracle databases running on the Sun Solaris operating system.

"We selected the Microsoft platform because of cost considerations and because it enabled us to move much faster," Duler says. "It also gave us a better interface with some of our technology partners."

For example, the company outsources policy processing and claims reporting to Fiserv SIS. Esurance's Web site takes customer data and routes it to Fiserv SIS, which issues policies, bills and claims reports. Esurance also selected Chicago-based CCC Information Services Inc. to provide loss adjustment services and to handle all claims from policyholders.

CCC also manages Esurance's 25-seat call center, which is located in Sioux Falls, S.D. Policyholders can communicate with call center representatives either through e-mail, via a toll-free call, or through a live customer chat function that's supported by the company's Web site, www.esurance.com.

"One thing that we did learn was that handling claims is a very people-intensive process," Duler says, "and handling claims is an important component for us. We spent a lot of time designing our architecture so that we could easily integrate third-party administrators." The company's servers are hosted by Quest Communications Int'l., a Santa Clara, Calif.-based company that has built a structure it says can withstand an earthquake measuring 7.5 on the Richter scale.

Helping hand

As Esurance slowly began to build its business in 1999, the company was able to secure financial backing and partner with carriers that provided the necessary licenses to sell insurance and reinsurance.

In May 1999, the company secured $5 million in capital from 21st Century Internet Venture Partners, Trinity Ventures and Stanford University. Last November, the company received an additional $34 million in funding from a group that included the same three investors plus Redpoint Ventures and Global Retail Partners.

Last December, Los Angeles-based Argonaut Insurance signed a five-year contract with Esurance and General Re to provide personal auto insurance via the Web. Under the agreement, Esurance became a managing general agent for the auto policies it sold online. Argonaut assumes 15% of the insurance risk on policies sold by Esurance, and receives a "fronting" fee of about 5% of premium for policies that Esurance sells. General Re is reinsuring 85% of the risk under the five-year contract.

"It's vary hard to build a business when you don't control the entire process," Duler says, "so eventually we would like to become our own licensed, risk-bearing entity that's supported by reinsurance through General Re."

Industry observers note that financially, it makes sense for the company to move in that direction so that it doesn't have to pay the fronting fees to Argonaut. However, they say it will take some time before Esurance is able to underwrite the policies it issues.

"Esurance in essence is a storefront, a marketing organization," says TowerGroup's Roby. "If they decide to get into underwriting, it most likely will be in a slow, conservative fashion and after they're able to build up their cash flow and develop a surplus."

Streamlined process

Esurance's Web storefront was designed to enable consumers to quickly receive quotes and purchase insurance online and to easily link to the company's customer support center when consumers needed assistance.

To get a quote for auto coverage, consumers first are asked to provide their ZIP code and answer a few questions about the make and model of the vehicle. Esurance than provides a quote and several comparative quotes from other carriers that are licensed to sell coverage in that state. Esurance uses technology from Union City, Calif.-based Quadrant for its quoting engine and to get information on comparative rates from other insurance companies.

Consumers also can add additional drivers or vehicles, or change their limits and deductibles, and view how those selections will affect their premium. If a customer opts to purchase the policy, Esurance uses such data as state department of motor vehicle information provided by ChoicePoint, an Alpharetta, Ga.-based provider of insurance information services, to validate the information that's been provided.

"Up to that point, we never ask them for their name or address," Duler notes. "We need that information before we can properly calculate the correct premium and issue the policy."

A policy is bound immediately on the Web site when a customer accepts the purchase terms and pays the initial premium using a credit card. When a policy is bound online, the customer is sent to a password-protected area of Esurance's Web site, where they can download a certificate of insurance and an insurance card for their auto. Customers also can opt to pay by check, but those polices are not bound until Esurance receives a "wet" signature.

The legalization of electronic signatures "was the greatest news that we had this year," Duler says. "We built this company on the notion that e-signatures would eventually become legal, and the new law is a confirmation and validation of our business plan."

With most of the pieces in place, Duler wants to grow Esurance's business by offering additional lines of coverage and through alliances with financial services companies.

"We had a few glitches we had to overcome that we fixed on the fly," says Duler, who would not elaborate. "We've learned a lot about e-mail, direct mail campaigns, overcoming some barriers and developing a data warehouse."

New products

Now, Duler has his sights set on rolling out a host of additional products including coverages for recreational vehicles and motorcycles, personal umbrella and homeowners and renters polices.

The company also is establishing partnerships with a number of well-known Web properties including autobytel.com, E-Loan and CarSmart.com.

"We recognize that brand strength is very important, and we're not going to spend a lot of money trying to develop a strong brand," Duler explains. "We're looking to piggyback with organizations that have strong brands that want to sell insurance but don't have the ability to. TheWeb provides the platform to integrate banking, brokerage and insurance."

It's a strategy that some industry observers believe will be successful. "Esurance is going to be a catalyst for change throughout the industry," says Todd Eyler, a senior analyst with Forrester Research Inc., a Cambridge, Mass.-based research and consulting firm.

"Esurance has a model that ultimately other carriers will copy because of its efficiency of operations, its organizational approach and its use of technology," he adds. "Esurance may have the best technology in the industry, at least the parts that consumers interface with. That's the company's ultimate strength."